The Sarbox Tax

I'm doing some reporting on corporate income taxes, and looking at why collections are shooting up so fast in almost all 50 states (See this NGA/...

I'm doing some reporting on corporate income taxes, and looking at why collections are shooting up so fast in almost all 50 states (See this NGA/NASBO study, page 35). The short answer is that corporate profits are way up. But when I spoke with Joe Huddleston, executive director of the Multistate Tax Commission, he added an interesting wrinkle.

Part of the answer, Huddleston said, has to do with the federal Sarbanes-Oxley law. Everyone knows that big business hates all the paperwork that goes along with Sarbanes-Oxley. What I'd never considered was that the paperwork might also translate into bigger state tax bills.

"Sarbanes has at least over the short term required a level of transparency in corporate transactions that we've never seen before," Huddleston told me, noting that legal tax evasion known as "tax planning" has slowed a bit. "Post-Sarbanes, those kinds of planning activities have become more difficult, and the ability of the states and federal government to look through these complex structures has gotten much better."

"Many businesses have adopted a better-safe-than-sorry philosophy," Huddleston added. "The result is that revenues in a lot of states have gone up."

It's impossible to say how much of the corporate tax windfall states are enjoying is a result of Sarbox. Huddleston guesses that it's probably not too large, and in any case, it probably won't last for long. "I suspect it's a short term trend," he said. "Just like any other regulatory procedure, over time the business community will become more comfortable with it and begin to find ways to maximize their own profits."